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How Intuit Reinvents Itself

Intuit employees taking part in the “Customer Obsession Tour,” a company-wide series of meetings about product improvement.Courtesy of Intuit

Geoff Colvin

October 24th, 2017

Taped to the wall outside Intuit CEO Brad Smith’s office is his unedited performance review from the board of directors. Also a personality analysis, a compendium of feedback from his executive team, and a breakdown of how he spends his time. Most of it is laudatory; some isn’t. “A normalized pace would be good,” his team says. “This guy is always on hyperkinetic energy.” Sometimes “his feedback is wrapped in so much niceness—we’d love to hear straight up, ‘Look, you fumbled.’ ” The board thinks he should “be willing to have more unstructured conversations—not everything buttoned up.” (Smith admits he’s so highly structured that his email in-box is empty at the end of every day and “I have two fingers between the hangers in my closet.”) The board also thinks he needs “to be willing to give constructive feedback in public.” That will be another challenge. Smith says, “My heart won’t let me do that.”

All of this feedback is publicly displayed. Spend five minutes reading the material next to Smith’s office door and you’ll know more about him than you know about some of the people you work with every day. Of course most of Intuit’s 8,200 employees will never walk past Smith’s office—so he emails the whole package to all of them each year.

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Transparency is great, but this, you might think, is ridiculous. No one seems to think so at Intuit intu , however, and that’s a clue to a mystery worth solving. It’s this: Why is Intuit still here? It’s No. 8 on Fortune’s new ranking of the Future 50, the companies best prepared to thrive and grow their revenue rapidly in coming years. Yet at age 34 it’s older than almost all the others. Its business, specialized personal-computing software, is brutally competitive. All its peers from 1983 (Flexidraw, VisiCalc) are long gone.

Yet Intuit is not just surviving, it’s blowing the doors off. Revenue, at $5.2 billion, is up 36% since 2012; profits are at an all-time high. Return on capital is a towering 60%, while cost of capital is a measly 6.9%, according to the EVA Dimensions consulting firm, which ranks Intuit’s financial performance in the 99th percentile of all public companies. Intuit is simultaneously more profitable than glamorous startups and growing faster than established incumbents. Even as its stock hits new highs, nearly all analysts rate it a buy. This is the Tom Brady of its industry—performing at the top of its game at an age when its onetime peers have long since stopped playing.

Here’s part of the explanation: Since its founding, Intuit has done what every company today must learn to do, disrupting itself continuously, reinventing its products and its business model before any competitor can beat it to it.

The company’s original product, Quicken personal-finance software, had to be re-­created when Microsoft Windows supplanted the DOS operating system. New products in the 1990s, QuickBooks for small-business accounting and TurboTax for personal tax preparation, defeated incumbents—and maintained their leads when Intuit re‑­created them online for the web’s earliest days. Those products had to be reconceived again at the dawn of the mobile era. It all seems obvious in retrospect, but each transformation was a mind bender at the time—doing taxes on a phone?—which Intuit achieved, avoiding the creeping danger of big-company disease.

Its current self-disruption, arguably more radical than any before, began five years ago when top managers decided Intuit had to be more than a provider of products and services. It had to become an open platform. “The average small business uses 16 to 20 apps, and we make three,” explains Smith, 53, who has been CEO for 10 years. “So we had to open up our platform and trust that this would make our customers more loyal to us and also would give us insights into problems we could go solve.”

The company gambled that it would become stronger, not weaker, by welcoming outside developers—potential competitors —onto an online platform where they can offer apps that work with Intuit products. Example: American Express offers a free app for holders of AmEx business credit cards that automatically transfers card transactions to the user’s QuickBooks Online account every day. It’s a selling point for American Express, and it ties QuickBooks customers more strongly to the platform by making their lives easier.

Charts show Intuit revenue and R&ampamp;D spending - Nicolas Rapp

Charts show Intuit revenue and R&D spendingNicolas Rapp

The open platform is working and now offers some 1,400 apps. It has also created unexpected opportunities for Intuit. For example, a major factor in the success or failure of a small business is whether it works with an accountant. Intuit has relationships with 600,000 accountants who use its tax software. So last year Intuit launched an online matchmaking feature to connect accountants with QuickBooks Online users. In the past year an estimated 600,000 small-business customers have become new clients of accountants, thanks in large part to this feature. “That’s a huge win-win for both of them,” says Smith, “and for us it increases the retention of QuickBooks by 16 [percentage] points.” Which is saying something, because the pre-matchmaking customer renewal rate for QuickBooks Online was around 75%.

Intuit thus is becoming an ecosystem in which several parties—customers, app developers, accountants, and Intuit—find new ways to interact for mutual benefit. Another reinvention.

80%: U.S. Market Share in Small-Business Accounting SoftwareQuickBooks has dominated this field since its 1990s debut. Intuit’s open-platform project has fostered some 1,400 new third-party apps that are cementing customer loyalty.

The recurring pattern is that Intuit disrupts itself without the motivation of a crisis. That’s highly unusual. Thousands of companies across the economy—retailers, carmakers, media firms, financial advisers—are trying desperately to remake themselves for a digital world lest they become the next Toys “R” Us or ­Kodak or San Francisco Yellow Cab: bankrupt, diminished, maybe dead. Few of those efforts will end well. Virtually all companies that get disrupted have a digital strategy; it’s usually inadequate, or they can’t execute it. Even survivors of a crisis almost always end up smaller, less significant in their industry, and employing fewer people. By contrast, Intuit preempts crises, compiling a record of prescient, low-drama transformation in a high-drama age, and thriving as a result.

All of which raises the giant question: How has Intuit done it? At a time when every company’s greatest fear is being disrupted by a competitor it never saw coming, the answer holds lessons for all businesses. The key to Intuit’s success is not simple, as we’ll see, but it is clear, and it has been largely overlooked. “There’s no business quite like it,” says Ned Segal, a former Intuit finance executive who left the company in August to become Twitter’s CFO. “Intuit is one of the best-kept secrets on the planet.”

To unravel the secret, start with a crucial event in the company’s early days. Its only product was Quicken personal-finance software, which founder Scott Cook had created in 1983. Intuit surveyed customers regularly, asking them among other things whether they used Quicken at home or in the office. Half said in the office. That made no sense, but Cook and his colleagues figured they were using office time to balance their checkbooks and manage their own money. Still, something seemed wrong. “Every time we asked that question, half said the same thing,” recalls Cook, 65, who now chairs the board’s executive committee and is still active at the company. “It just bugged me. Why were people answering that question wrong? So finally we dived in.”

Cook and company discovered they were way off base. Those customers weren’t balancing checkbooks: They were using Quicken to run small businesses. “But why were they using Quicken?” Cook wondered. It wasn’t designed for businesses, while dozens of other software products were. It turned out the other products replicated big-company accounting—and most small-business bookkeepers knew nothing about double-entry bookkeeping. “For most of them, ‘general ledger’ was a World War II hero,” Cook recalls. “So we built an accounting product that didn’t seem to have any accounting.”

The result was QuickBooks, which passed the market leader (called DacEasy) in just two months, even though QuickBooks cost twice as much ($99 vs. $49) and had fewer than half the features. “But we had solved the biggest unsolved problem,” Cook says. Today QuickBooks brings in half of Intuit’s revenue.

Scott Cook. - Amy E. Price — Getty Images for SXSW

Scott Cook.Amy E. Price — Getty Images for SXSW

Scott Cook (Cofounder; Chairman, Executive Committee)Cook cofounded Intuit in 1983; he created Quicken, its original software, and was CEO until 1994. Intuit’s focus on self-reinvention and customer observation took shape on his watch, as did its reliance on “savoring the surprise”—digging into data that seems odd or nonsensical to find business-changing insights.

The key, which Intuit has never forgotten, was to focus on the finding that makes no sense. Most organizations do the opposite, as Cook and his colleagues did at first. They ignore the information that doesn’t fit, or convince themselves it isn’t important. Time and again, digging into the puzzling discovery —“savoring the surprise,” as Intuit’s leaders call it—has enabled the company to reinvent itself before competitors caught on. For example, Intuit recently found that some users of its online money management service Mint weren’t behaving like the young-professional target market. Investigating that surprise showed that these customers used Mint to manage self-employment income and spending; many were Uber or Lyft drivers, for example. With the gig economy growing, Intuit recognized a huge opportunity. So it created a version of QuickBooks especially for the self-employed. It’s the company’s fastest-growing product.

These critical insights never would have happened if Intuit hadn’t been studying its customers rigorously—another vital element of its success. All companies claim they want to get close to their customers, but few do it as obsessively as Intuit. Its most effective tool is the “follow-me-home.” A few employees together visit a customer’s home or office (with permission) and watch him or her using Intuit products. The employees are trained in how to do it: You don’t interview the customer; you just observe. They debrief immediately afterward because they all will have noticed something different, “so you get a complete picture much faster,” Smith says. “It puts a face to a problem. You see the humanity.”

The underlying reality is that you can’t believe what customers tell you, as most companies learn the hard way. Customer behavior is the truth.

FIELDWORK: Intuit staffers (dark shirts, foreground) meet with customers on a “follow-me-home”—a visit to observe how the company’s products get used in real life. - Photo: Jake Stangel

FIELDWORK: Intuit staffers (dark shirts, foreground) meet with customers on a “follow-me-home”—a visit to observe how the company’s products get used in real life.Photo: Jake Stangel

The follow-me-home also has deep roots. Early customers were calling to complain of problems that hadn’t shown up when Intuit brought users into its offices to test software. Cook realized he was missing something but didn’t know how to find it. Then he read a Wall Street Journal article about American homeowners suing a foreign automaker. The plaintiffs had rented rooms in their homes to students at nearby universities, only to find that the “students” were actually employees of the automaker whose purpose was to observe how Americans use their cars. In this creepy tactic, Cook saw the kernel of a great idea. “We went to a local computer store, and every time they sold one of our products they included a note from us saying, ‘We’d like to come watch you take the shrink-wrap off the product’ ”—and then observe what follows. Thus was born the follow-me-home. Today Intuit conducts some 10,000 hours of these visits annually. Smith himself does 60 to 100 hours a year. “What you get from a follow-me-home you can’t get from a data stream,” he says. “You’ve got to look somebody in the eye and feel the emotion.”

So Intuit obsesses over customer intimacy, and it has trained itself to embrace anomalies. Those are major strengths. But still, this is a big, successful business, and as every deposed CEO knows, that creates incentives to reject any change to the established order. Intuit therefore deploys clever managerial techniques to evade or defeat the organizational change-killers. Among them:

Tiny teams. New ideas are initially developed by “discovery teams,” typically only three people. They don’t report up the chain of command but instead go straight to a division general manager. The teams get intensive coaching every week or two from the GM or Cook, which helps them stand up to the barrage of opposition they’ll inevitably face from those with a stake in the status quo. The new self-employed version of QuickBooks was developed by a discovery team.

Shared experiences. When new ideas get further along, shared experiences can often obliterate conflicts. Six or seven years ago, when Smith wanted Intuit to focus on mobile devices, stiff pushback came from managers who believed the then-conventional view that no one makes money on mobile. So Intuit found companies that were making plenty of money on mobile and assigned managers to interview their executives. Next step was an off-site where they would report what they learned. “We didn’t have enough time,” Cook says. “They wouldn’t stop. They were convincing each other there was money to be made in mobile.” Today, using TurboTax, you can prepare and file a full 1040 from your phone.

Shared data, fast decisions. “My staff meeting used to be just me and my 12 direct reports,” says Smith. “Now we broadcast it to our top 400 leaders every month, and they have 24 hours to cascade it to all 8,200 employees.” A lot of infighting disappears when everyone knows what the top leaders are doing and why. Decisions get made much faster, and when a conflict arises, Intuit follows a sunset rule: If you can’t resolve it in 24 hours, you get another 24 hours to escalate it high in the organization to get a decision. “We’re just going to make the call and live with the consequences,” Smith says. “If it’s wrong, we’ll learn from our mistake and move on.”

Any company could adopt those managerial techniques tomorrow, at least in theory. Far more difficult to adopt, and perhaps more important to Intuit’s self-disruptive success, is a culture that facilitates reinvention. A key element is permission to admit mistakes, shortcomings, and failures, which is valuable in two ways.

First, when an organization tries to change, it is implicitly admitting something isn’t working. No organization wants to admit that. People get punished when something isn’t working, right? And if no one will go there, change is forever blocked. Change gets unblocked when top managers routinely admit their mistakes. In 2009, when Smith had been CEO for a year, he presided over a dinner for about 100 people in engineering and product design, including some from other companies. “Brad gave a talk and said, ‘Here are the things I screwed up on,’ ” Cook recalls. “It was hard to imagine any other CEO giving that talk.” In 2015 the company raised prices on its desktop TurboTax products, and customers revolted. The business’s leader, Sasan Goodarzi, said, “ ‘I own this decision. I had no idea this would happen, and I’m sorry to you all. Here’s why we did it,’ ” reports a witness. “It made a big impact.” Goodarzi is still at Intuit and widely considered a rising star. Every company says it wants to learn from mistakes, not punish them, but few companies live that way.

The second advantage of an open, fess‑up culture is subtly different. Remember those performance reviews and feedback reports taped up outside Smith’s office? They’re Smith’s proclamations that he himself must change. When top leaders admit that they must fix their flaws, it’s hard for others to claim that they or their business unit are beyond improvement.

35 Million: U.S. Individual Income Tax Returns Prepared by the 2017 Deadline With Intuit’s TurbotaxThat’s almost twice as many as the 19 million prepared using the software and services of runner-up H&R Block.

The temptation to leave things alone is powerful right now, with Intuit performing so well. Yet the company faces sobering risks. The most obvious is a data breach. If you use TurboTax and QuickBooks, Intuit knows your Social Security number, your bank account numbers, your credit card numbers, everything about your brokerage accounts, and your children’s names, among other things. Consumers rank Intuit No. 8 among all companies for privacy trustworthiness in the latest survey by the Ponemon Institute research firm, just behind HP and ahead of PayPal. That’s a titanium-strength competitive advantage, but it could vaporize after a major break-in.

Though Intuit utterly dominates its fields, competitors aren’t giving up. Its most credible competitor is Xero, a New Zealand–based small-business accounting startup. It’s a minor factor in the U.S. and Canada, where Intuit rules; trouble is, Intuit is a minor factor in the rest of the world. Intuit is belatedly going global, and because its software is available as a service in the cloud, it has at least a few customers in 180 countries. But most of the planet remains wide open to competitors, and Intuit’s brands aren’t nearly as strong abroad as they are in North America.

There’s even a danger, probably small, that the IRS might become a competitor. Intuit is one of several software companies that in 2003 agreed with the IRS to provide free tax prep and filing for low-income taxpayers; in return, the IRS promised not to offer tax software. That agreement expires in October 2020. The very thought of IRS software probably makes most taxpayers’ blood run cold, but since the prospect of crossing the IRS is even scarier, millions might opt to use such a product.

Intuit, in its disciplined way, is sending scouting parties in search of the next big transformation. Starting last fall, the company grouped 70 of its leaders into small teams and told them to investigate eight major trends that arose in customer interactions and tech forums—how consumers under age 10 use technology, conversational user interfaces, artificial intelligence, blockchain, and more. Their reports sparked still more topics to pursue, all of which—23 in total—have now been investigated Intuit-style, as Smith details: “through 500 follow-me-homes, 225 interviews with everyone from Marc Andreessen to the founders of Airbnb and Uber, and 100 experiments conducted across five continents.”

No company tries harder to find the next big disruption before it finds them. Intuit understands that in the digital world there are no final victories but plenty of final defeats, and success is always tenuous. That’s how a tech oldster lands on the Future 50. As Cook says, Intuit’s current 23-topic initiative is nothing new. It’s what the company does. “It’s another opportunity to change before it’s needed.”

A version of this article appears in the Nov. 1, 2017 issue of Fortune.